2023 (3) TMI 725 - HC - Income Tax

Gain on sale of shares - long-term capital gain or profits and gains of business - distinction between “investment” and “stock-in-trade” - material significance of intention at the time of purchase of the shares -period of holding of the shares - tribunal held that the sum should be assessed as long-term capital gains - HELD THAT:- Tribunal was fully justified in coming to the conclusion that not only capital and reserve of the assessee was several times more than the investment in shares in respect of which STT was paid, but even the profit of one year was several times more than the investment. Therefore, in our view, the fact situation has been clearly brought on record by the tribunal which was failed to be taken into consideration by the CIT(A). Therefore, the conclusion arrived at by the tribunal in this regard cannot be faulted. Consequently, we hold that the CIT(A) would not have drawn a presumption that merely because the fund flow was from a cash credit account, it pre-supposes that borrowed funds were utilised for the purchase of shares especially when it is a specific case of the assessee that it is a mixed account which has not been shown to be wrong by the revenue.

Correctness of the observations of the CIT(A) that the shares were thinly traded and highly illiquid and that the companies have not declared dividends - It is only when the genuineness of the transactions is doubted, there would be an occasion to examine whether the shares were penny stocks or not, what was the percentage of appreciation, the period during which the appreciation took place and was the appreciation beyond the normal person’s expectations etc. Thus, in the absence of any doubt raised either by the assessing officer or by the CIT(A) as regards the genuineness of the transactions, the CIT(A) could not have held that the transaction was in the nature of business transaction as the companies have not declared dividend. Such finding rendered by the CIT(A) in our opinion was rightly reversed by the tribunal.

Principle of consistency - The gains from the remaining long-term shares of the sixth company sold during the previous year relevant to the assessment year 2006-2007 was treated as business income by the assessing officer which order was reversed by the CIT(A) and affirmed by the tribunal by order dated 11.02.2011. The assessing officer once again for the assessment years 2007-2008 and 2008-2009 sought to treat the same as business income which was reversed by the CIT(A) and the tribunal dismissed the revenue’s appeal by the orders dated 11.05.2011 and 18.08.2011 and those orders have attained finality. Therefore, for the solitary year, the year under consideration, a departure from the consistent manner in which the department viewed the transactions, cannot be disturbed.

In the absence of any doubt raised by the department with regard to the purchase of shares treated as investment for the preceding years and the subsequent years, a departure cannot be made by the department for the year under consideration.

Circular No. 4 of 2007 dated 15.06.2007 was issued with regard to the distinction between shares held as stock-in-trade and shares held as investment and the tests for such a distinction were laid down.

Effects of the circulars issued by the CBDT dated 29.02.2016 and 02.05.2016 - Circulars dated 29.02.2016 was with regard to the issues of taxability of surplus on sale of shares and securities-capital gains of business income-instruction in order to reduce the litigation. The need for issuing such a circular arose on account of a disputes on the applications of the principles laid down by the courts mentioning different parameters to distinguish the shares held as investments from the shares held as stock-in-trade.

In terms of the circular the assessee’s precluded from taking a contrary stand in the subsequent years. If that be so, the same embargo can also be placed on the department, by holding that the department cannot take a different view in the subsequent years in the absence of any fresh materials warranting such departure. Reading the circular in its entirety will show that on account of dispute which had arisen while interpreting the directions issued by the courts and tribunal the Board thought fit to issue appropriate instructions to the field formation. Therefore, it is to be understood that the circular would be retrospective in operation. In any event, as rightly contended by the learned senior advocate for the assessee in the event the matter is remanded for fresh consideration to the assessing officer either by the CIT(A) or by the tribunal nothing prevents the assessee from referring to the circulars and the theory of prospectivity or retrospectivity loses its significance.

Thus, we hold that the circulars can be referred to by the assessee and they being at least partially beneficial to the assessee has to be held to be retrospectively applicable in so far as the instructions/clarifications which enure in favour of the assessee’s.